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The Real Japan "Panic" Indicator May Hit At 1pmET

The Japanese government bond market has been cataclysmicly volatile in the last few days since the BoJ shifted from words to action - with an average daily range 8-times normal. But, as a rather famous rates desk trader recently noted, if there is a real "Japan Panic" trade, it will make itself evident at 1pm ET today. His reasoning is impeccable. The BoJ has embarked on a program where it will be buying 'more' long-maturity bonds than the government issues (at around $80bn equivalent per month, ad infinitum, in a nation, that we pointed out here, has a GDP that is 40% of the US.) This surge in liquidity, which as is well known across the G-7 is completely fungible (within and across all bank balance sheets), has to leak somewhere, and the 30Y US Treasury bond is now the highest-yielding 'safe asset'. However, the Fed is monetizing vast amounts of US Treasuries indirectly and so the only way for a large Japanese investor to buy enough to make a difference is at the auctions. And so, if the 30Y auction today prints with a large "negative tail" - inside of the WI - then it would go a long way to confirm the "Japan Panic" trade is on.

The 30Y Treasury has average a 0.74bps positive tail on average, we will be looking for a negative tail today...

For reference, 30Y Bid-to-Cover has been relatively stable since the crisis began...

as Japanese bond volatility explodes...last night was the biggest range in 5Y JGBs in almost 5 years